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Saturday, April 09, 2005

McMillan on Options


$SPX has failed repeatedly at 1190 -- including the nasty downturn last Friday. Moreover, the 50-day moving average is just above that level, while the 20-day moving average has now dropped below it. As for other indices, $OEX and $DJX are probably a little less bullish than $SPX. For example, the 50-day moving average of $OEX is at 570, while the 50-day moving average of $DXJ is at 10,650. Thus, these averages have more to go before they attain that level.

Why do we view the 50-day moving average as important? Because many institutions adopt a bearish stance (or less bullish stance) when the averages are below their 50-day moving average, while they adopt a more bullish stance when above the 50-day average. Statistics bear this out, as it has been shown that merely going to cash when the market ($SPX) crosses its 50-day moving average from above to below, and going back into stocks when it crosses the 50-day moving average from below to above, outperforms buy and hold by a huge, huge factor. Any institutions practicing that methodology are "out" of the market right now, but would get back in on a close above the 50-day average. As for $SPX, the 50-day moving average is at approximately 1194.

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